The Debt Ceiling

It is beginning to look as though conservatives are serious about their proposal to refuse to raise the debt ceiling and to allow the country to default on its obligations. This is a serious business and the results could be catastrophic for the economy.

Whenever expenditures exceed revenues, the resulting deficit must be funded by borrowing. Throughout most of its history the government has run an annual deficit and issued Treasury Bonds/Notes to makeup the difference. These are purchased by individuals, organizations, and other nations. They are considered safe investments by investors around the world and as a result the United States can offer these instruments at low interest rates.

Before 1917 Congress had to approve every borrowing, but this was replaced by a debt ceiling, approved by Congress every so often, which allowed for smoother operation.

Expenditure and debt authorization are separate actions by Congress. The debt ceiling does not place any limit on expenditure in advance—it merely permits financing of deficits after they have been accrued. The debt ceiling has been raised numerous times in the past and until recently this action by Congress was routine.

Deficits are generally small—except when the country is fighting a war or in the midst of a recession—and the national debt is not a problem. Wars are enormously expensive. Recessions reduce revenue because people are out of work and not paying taxes.

What happens if Congress refuses to raise the debt ceiling to cover deficits resulting from expenditures they have approved? The country's credit rating will be downgraded and investors will demand higher interest rates to purchase our bonds. The increase in interest rates will actually make the deficit even worse. The lack of confidence in the nation's fiscal policies could also do substantial harm in the markets and push the country back into recession.

Defaulting is something you do only once, like losing your virginity. Getting the credit rating back to previous levels after a default would be extremely difficult. Investors would be likely to take a wait and see attitude, meanwhile enjoying a higher rate of return on their investments.

Threatening default has always been an unthinkable option to this point, but it is now a serious threat.

Here is a table from the Bipartisan Policy Center showing what would happen if the debt ceiling is not raised and Treasury is forced to prioritize payments from February 15 to March 15. If you fund the bills in the green table, you are forced to postpone those in the red table:

I hadn't taken a look at that sort of a chart since this whole mess started. I knew it was bad. I just thought their brinkmanship would take us to the edge, investors would raise our interest rates, and then congress would come to its senses and fix things up. I never dreamed they might actually stop paying people. I mean, I knew they were stupid, but I didn't think they were that stupid.

However, they aren't going to default on defense contracts. Somehow, I am pretty sure they aren't. It just means we are more screwed in other places, though.

The problem for the Obama administration is that allowing the debt ceiling to become a bargaining chip in negotiations sets up an endless series of devastating confrontations with Congress that will disempower the Executive Branch permanently.

For the good of the country, the GOP cannot be allowed to succeed in this effort—it is a major threat to the viability of government. One possible way out is to issue scrip—warrants for future government payment which can be used to obtain loans from banks or traded to other holders for goods and services.

P.S. If it happens that the government must prioritize spending, your girlfriend's financial aid is likely to be fairly low on the list of priorities.

Some do not realize the pension crisis facing people world-wide. Not only the US, but other nations face the same dilemmas. My children, and probably you and your children work as hard as they can and they are unable to keep up with all the demands made on their resources. Something isn't working and we have the ability to figure out a solution where needs of working people and needs of old people can be met. They are not being met in current processes or ways of solving the crisis. As long as Democrats and Republicans focus their attention on protection for corporations and not people, we will continue to have a spread between rich and poor. I can't think of a better way to have chaos in the streets.

"The ratio of workers to pensioners (the "support ratio") is declining in much of the developed world. This is due to two demographic factors: increased life expectancy coupled with a fixed retirement age, and a decrease in the fertility rate. Increased life expectancy (with fixed retirement age) increases the number of retirees at any time, since individuals are retired for a longer fraction of their lives, while decreases in the fertility rate decrease the number of workers.

"In 1950, there were 7.2 people aged 20–64 for every person of 65 or over in the OECD countries. By 1980, the support ratio dropped to 5.1 and by 2010 it was 4.1. It is projected to reach just 2.1 by 2050. The average ratio for the EU was 3.5 in 2010 and is projected to reach 1.8 by 2050.[4] Examples of support ratios for selected countries in 1970, 2010, and projected for 2050[1]:"

The pension problem, which—as you note—is demographic in origin, has been further compounded by the failure of corporations and governments to fully fund their pension obligations.

Here in San Diego the City Council deliberately underfunded the pension fund for teachers, police, and fireman for years. Their method was to overestimate the return on investments held by the fund. The mayor had to resign and a court ordered the city to make up the deficiencies, which now leaves it unable to adequately fund present needs. There was a question of whether the council would be indicted for fraud.

There have been such people in the past. One was Daniel Patrick Moynihan, who understood things better and earlier than most people in government. There was a time when John McCain was a much better senator than he is now, although he was always a nasty individual. Mario Cuomo was an excellent governor for New York and had broad viewpoints. Richard Lugar was a good senator on foreign policy. John Chaffee was an excellent governor in Rhode Island and a good senator as well. There are others, these are just the ones I encountered along the way for one reason or another.

Unfortunately the system has evolved to make it more difficult for such people to grow up in it or to stay good for very long. It's viciously partisan, short-sighted, and corrupt.

The declining ratio of workers to pensioners in much of the developed world suggests a modest proposal: after perhaps two years of retirement, more than two years for retirees in good health, our offspring could have us for dinner.

Two more problems relate to the pension shortfall: It was much easier, decades ago, to promise generous retirement benefits than to raise salaries. Those in charge figured that, by the time the vultures came home to roost, they'd be gone and it would not be their problem. Another is that, in calculating expected life spans, they used standard charts giving averages. But they didn't know, or it hadn't been learned, that retirees from government, education, and some other careers live much longer than the average. Given decent health insurance -- often another benefit in lieu of pay -- they live even longer. (I should say "we;" as a retired teacher of 77, I may go another decade or two. Thus, I'm part of the problem.) When the general fund was allowed to dip into the Social Security lock box, it became easier and easier to bend first, then break the promised support.